Apple: Desperately Seeking Capitulation

I confess I never imagined that Apple (NASDAQ:AAPL) would correct so much. My best-case bear scenario was around $480, but even then, I imagined the stock would rally again close to the $700 mark. Well as it turned out, the stock took out $480 on the charts and never looked back. Apart from a small 10% rally, the stock has been all downhill from there.

So where does Apple's downhill stop? No one really knows and personally, I don't think it has anything to do with the company's fundamentals. I think it has more to do with market psychology and the unwinding of leveraged positions than anything else. So the million dollar question is, when will the unwinding end so the selling can stop?

Well in order for that to happen at this point in time, we need capitulation - a massive sell-off over a several day period. And what might be the catalyst for this capitulation? Analysts downgrading Apple is a very good way to achieve this. And speaking of Apple downgrades, they are almost a daily occurrence. On Wednesday both Citigroup and Barclays cut their price targets on Apple's shares as well as their estimates for the company's second fiscal quarter.

Citigroup cut its price target to $480 from $500 and Barclays cut its price target to $530 from $575. In addition, both brokers cut their sales estimates for the iPhone and iPad by 1 million units for the March quarter. Also, the issue of market share is surfacing again and both brokers expect Apple to lose market share.

Analyst Adnaan Ahmad at Berenberg also downgraded Apple from a Buy to a Sell and had this to say:

"The smartphone investment of the past three years is now a smartphone trade. This is very similar to what happened in the handset industry a decade ago, when volumes topped out in developed markets and were led by growth in emerging markets. Apple and Samsung margins are peaking and growth is going to be driven by the margin-dilutive mid-to-low-end segment in the next 24 months. In our opinion, this will translate into poorer industry fundamentals."

Well I couldn't agree more, since this is what I have been saying all along about Apple (my Apple bear logic here). But like I also said many times, most analysts are behind the curve and as such, it is too late to trade on such information -- because believe it or not -- it is already priced into the stock. Markets do not wait for analysts to capitulate.

So what will a capitulation look like? That's hard to tell and we will see it when we see it, but looking at the chart of Apple below, I think we will need a very fast move to the downside -- perhaps as low as the $370 mark on the chart -- with perhaps as much as 400 million shares changing hands in a week.

(Click to enlarge)

But in order for capitulation to happen, in addition to analysts, we also need the investing public to be very bearish on Apple. I am sorry to say but I don't really see much of that. Just about every Apple article here at Seeking Alpha is still gung-ho on Apple. Everyone is still praising buying and holding Apple and how cheap the stock is, but no one wants to throw in the towel yet. Apple, for most people, is still the super stock it was at $700.

Bottom line

While many analysts have begun downgrading Apple, the truth is that the market is ahead of them and most downgrades are of little use to investors at this point. In order for Apple to see a bottom and make investors excited about the stock again, I think we need to see capitulation.

Capitulation is a natural occurrence in the market that humbles investors, reminding them that it is the market, and not them that dictates the terms of the game. It is also a reminder that the market can be very generous with investors, but can also be merciless and take it all away from them if they are not humble.

So, do we have any Apple capitulation volunteers today?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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